The Option Investor Newsletter Tuesday 10-10-2000 Copyright 2000, All rights reserved. 1 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101000_1.asp Posted online for subscribers at http://www.OptionInvestor.com ****************************************************************** MARKET WRAP (view in courier font for table alignment) ****************************************************************** 10-10-2000 High Low Volume Advance/Decline DJIA 10524.40 - 44.00 10623.50 10488.90 1.05 bln 1140/1680 NASDAQ 3240.54 -115.02 3383.40 3229.01 1.89 bln 1319/2626 S&P 100 737.68 - 6.55 748.66 735.41 totals 2459/4306 S&P 500 1385.94 - 16.09 1408.83 1383.85 36.3%/63.7% RUS 2000 481.63 - 7.90 490.84 481.09 DJ TRANS 2497.23 + 6.60 2526.22 2479.04 VIX 27.44 + 1.11 27.89 25.89 Put/Call Ratio .82 ****************************************************************** Welcome Back To Earnings Warning Season October has a way of twisting things around and sending the markets reeling and today was no exception. Are you having any fun yet with this year's shakeout? Today was no exception as stocks took it on the chin once again. The downtrend lasting nearly six weeks remains in tact. If anything we have seen a sharp increase in volatility as the VIX made its way up to 27.50. This has helped liven up the options market relative to a dull summer, but the bulls remain in hiding. At least the smart bulls anyway. Today was just brutal as any remaining buyers were tough to find. It shows in the numbers too. The Dow Industrials pierced 10,500 intraday, before managing a small rebound to close at 10,524.40, down 44.03. Volume was average at 1.04 million. Advancers lost to decliners 17-11 and 116 new lows were printed versus 37 new highs. The S&P 500 couldn't hold 1400 and settled down at 1385.94. The Russell 2000 also gave up ground by losing 7.90 to finish at 481.60, below technical support. The chart of the Dow 30 below shows the peril the index is facing. A close below 10,500 will not be well received by Wall Street, making the current support at 10,500 critical. The Nasdaq didn't have any better luck today. The close was at 3240.53, down 115.02. Volume was heavy at 1.83 million. Decliners were ahead of advancers 2-1 while new lows seriously dwarfed new highs 282-16. The downward pattern is clearly in tact as sellers pressure any rally. In fact, the selling has now accelerated as the Nasdaq broke down below that channel we had been watching for the past two weeks. Hopefully this is a good sign that a final capitulation is around the corner. The markets are oversold and will eventually bounce, but that is not to say it can't get more oversold first. The story of the day though was related to earnings, both announcements and warnings. And all came after the close this afternoon. Let's start with the losers. Lucent announced today after-hours that, based on preliminary estimates, it expects earnings for Q4 to be lower than the company's previously announced guidance. LU was supposed to post a profit of $0.27 next Thursday, but instead will only turn in about $0.17-0.18 cents per share. The insanity of this warning is that it is the third time this year and second time this quarter that Lucent has warned of a shortfall. The company said the lower-than-expected earnings for the quarter could be almost equally attributed to three factors: less than expected revenues and gross margins in the company's optical systems business, credit concerns in the emerging service provider market that led to increasing reserves for bad debt, and greater than anticipated decline in circuit switching sales and margins. So while the company continues to warn, investors continue to sell. LU closed the day at $31.38, but is trading around $24 in after-market action. Also, PacifiCare Health Systems announced that it expects to report results ranging from a loss of up to $0.10 per share to break-even for the quarter ended Sep 30th, based on preliminary data showing higher-than-anticipated commercial and Medicare health care costs. These costs reflect the impact of providers operating under non-capitated agreements, and amounts incurred to improve network stability and maintain member continuity of care. As a result, earnings per share for 2000 will not meet the company's expectations. PHSY traded to $32.63, down $0.88 during regular trading, but was around $20 after-hours. And now to earnings. Yahoo started the Internet earnings parade like always this afternoon. They said they earned $81.1 million or 13 cents per diluted share on a pro forma basis in the third quarter, compared with $38.5 million or 6 cents per share in the year-ago period. The pro forma earnings compared with the consensus analyst estimate for earnings of 12 cents per share, according to First Call and were right in line with whisper numbers. The company said revenue rose 90% to $295.5 million from $155.9 million. Analysts were expecting revenue of about $281-$295 million. Yahoo, which relies heavily on adverting sales to generate revenue, said Web site traffic increased worldwide to 780 million page views per day on average during September, compared to an average of 680 million page views per day during the last month of its second quarter. Slowing ad revenue was a concern in the past weeks. All in all, the report was right in the middle of expectations, but the phrase "difficult environment" was mentioned eight times on the conference call. Eight times! It appears that Internet arena will continue to see rough times ahead, at least for the next couple of quarters. The stock initially traded higher on the news, but has pulled back to close after-hours around $76. This is the kind of report that may take a few days for investors and analysts to decide if Yahoo deserves the lofty valuation that it still carries despite the recent sell-off. Biotechnology firm Biogen on Tuesday reported a 10% gain in third-quarter income, beating Wall Street estimates by a penny. The maker of the multiple sclerosis drug Avonex said its net income rose to $68.4 million, or 44 cents per diluted share, up from the year ago period when it reported $62 million in net income or 39 cents a diluted share. James C. Mullen, Biogen's President and Chief Executive Officer, said, "With its proven results and broad-based efficacy, AVONEX remains the worldwide drug of choice among people with multiple sclerosis (MS) and their physicians. This quarter, we saw global product revenue growth of 18 percent year-over-year." BGEN was trading higher after-hours to $53.50 from the regular close of $51.50. News on the conference call revealed that three clinical trials will begin on anticipated drugs in the year 2001. And finally, Motorola released earnings as well. MOT said that its profit from operations before special items was $598 million, or 26 cents per share, an increase of 66 percent from $361 million, or 16 cents per share a year ago. Robert L. Growney, president and chief operating officer, said, "Motorola continued to make solid progress on improving its financial performance. Significant contributions to the company's growth in sales and operating profits came from the Semiconductor Products, Broadband Communications and Global Telecom Solutions segments." The much anticipated cell phone margins were in line at 6%. MOT was trading about even with the regular session close. While not the story of the day, Semiconductors definitely came in a close second. The SOX.X got hammered again and broke more support levels. I had to insert a chart so you could see the degree of carnage that the SOX has suffered. The thing about Semiconductors (that anyone who trades them could tell you) is they are very jumpy, like most commodity based sectors. Just when it looks the darkest, it will turn on a dime and trap you into a losing trade so be careful. The one thing you can expect is more volatility for this bunch. This sector loves to bounce around in October. So the first big day of earnings numbers has come and gone and the markets don't look to be better off because of it. The QQQs are trading in the mid-77 range after-hours as Yahoo is selling off. The Lucent warning will do little to help sentiment. Anytime you see Drugs, Oil, and Utilities rising, you know that we are in some degree of trouble. I put a strangle on the QQQs this morning which should be pay off nicely in the morning. I am hoping for a nice gap down to take my profits on the puts in the morning. From there, it is still tough to call a bottom in such an extreme market. But if it gets extreme enough, there should be opportunities to buy calls. In fact, I am just now watching CSCO trade $49, below the critical $50 level and well below the $51.25 close. Maybe we will get that final crack in the buyers and see the rapid spike down that some bulls are waiting for before entering the market. A more safe play if you are looking for an entry in such a spike down would be November contracts. Leave the OCTs for the gun-slingers at this point. No nothing new to report from Switzerland where Jim is attending a conference. He will be back in the States this week though, so look for his market commentary beginning again on Sunday. Ryan Nelson Editor ***************************** OCTOBER OPTIONS WORKSHOP DENVER - Oct 27-30th ***************************** We May Be Close To A Bottom, Are You Ready To Take Advantage Of It? Are you using the Power of LEAPS? Did you know you can generate Cash on a monthly basis writing calls against your LEAPS? We will be teaching powerful LEAP strategies at the Denver Options Workshop. Are you watching for the early reversal patterns with candlestick charting? You can learn how to spot these as Mr. Steve Nison presents his early signal indicators. There is a great opportunity ahead of us and it does not matter which direction the market goes! What really matters is whether you have the EDUCATION to take part in the move! We are providing a Powerful four-day Workshop that will fill in the gaps and provide a foundation for greater achievement in the options arena. Don’t Wait To Register Seats are filling up fast! To sign up click here: http://www.OptionInvestor.com/workshop There is ONLY 2 WEEKS LEFT until the Denver Options Workshop! We have over a dozen speakers that will be filling you to the brim with Knowledge on strategy, technical analysis and preparing you to act on market moves. Don’t wait to enhance your education, Come to the Denver Options Workshop and associate with other traders and professionals. The event will be held on October 27-30 at the Inverness Hotel and Golf Club. We will see you there! To register click here: http://www.OptionInvestor.com/workshop Check out an outline of events here: http://www.OptionInvestor.com/workshop/outline ********************************Advertisement******************** Option trades starting at only $15.50, stock trades as low as $9.95! Mr. Stock provides key advantages to the serious option investor. Along with complex option trading online, fast executions, advanced charting capabilities and the ability to trade from any screen, we now offer some of the best commissions on the Internet. Our staff understands the sense of urgency required in today's market and will respond quickly to your most important trading needs. http://mojofarm.mediaplex.com/adserver/click_thru_request/565-58-1875-3 ***************************************************************** **************** MARKET SENTIMENT **************** Look...Light At The End Of Our Tunnel! By Austin Passamonte Funny, I never realized light preceded such a rumbling thunder. That's what we heard this morning as the Dow tried valiantly to oust the tech sector from its doldrums. For a brief while there we saw green painted on our chart screens and hope actually sprang eternal for traders holding calls. Freight-train express heading straight south... choo - choo! Reality set in and stop orders were struck. Looking over the daily charts for all major indexes, it's been quite some time since we've witnessed a prolonged market slide like this with precious little relief. Is any in sight? By now you've read the Market Wrap and discovered who's been naughty and nice so far, 'fessing up to earnings reports. The markets will move tomorrow based on such news. We are up to our necks (or other body parts) in negative sentiment and every buying attempt is met with waves of eager selling. Everyone but those wanting out of long positions and objective reporters (oxymoron?) are sick & tired of the selling. Doesn't that count for anything? Yes. The markets are nothing more than a giant collection of humans. Humans run on human emotion. Therefore, markets run on human emotion. These are the very same senseless animals who couldn't buy tech stocks fast enough less than two short months ago. All the warnings we are now experiencing were forecast then, but nobody cared. COT Reports? VIX? High oil prices? Seasonal tendencies in Sep/Oct? Jim Brown & Market Sentiment preached this until blue in the pixels during August and few cared. Actually, a few who did care cancelled subscriptions and said we were too bearish. We hope they used their subscription money saved to buy distant-month puts back then. This market is technically ugly and worse every day. Support is being tested and broken most every session. A bottom could lie near or far below. Which is it? Beats us, but here are some clues to watch for... 1. The VIX is trending higher. It is now in the 26 - 27 range which could signal a market bottom at any time. Do the bulls recall how long we preached that below 20 was danger? Other side of the equation now; the VIX is to be looked on as bovine-friendly these days. 2. Put/call ratios are soaring and overhead disparity is nil. We are ripe for a powerful short squeeze, but don't mistake it for an autumn rally with legs. Trade it day by day when it comes and maybe the days will actually string together. 3. Oscillator signals on charts are failing to signal the downside very well at all. They have no chance to cycle into short-term overbought on intraday charts before the massacre continues. This customarily happens towards the tail end of extreme moves just before reversal occurs. 4. Stocks are cheap. We don't care how gloomy near-term earnings are, humans are emotional animals, remember? Winter is coming and they need to store away supplies in advance. INTC in the $30s and CSCO near $50 among a cast of hundreds are too tempting for many to pass up very long. The first wave of nibbling could easily ignite buying fever like blue-haired ladies at a Friday-morning yard sale. 5. The Commercials. These are exactly the conditions when market giants begin to quietly amass long positions in the market. They are the ultimate contrarians and survive by shearing small trader "sheep" over and over again. We will watch each Friday's COT report, looking for signs of the S&P 500 commercials covering their decade-high short position. We will also back up the truck for calls & LEAPs when they reach flat or net-long positions. When all technical hope is gone, when our crystal ball turns black as a Brunswick we rely on that last bastion of market truth; the overwhelming sentiment is always 100% wrong at the turn. We can't be sure where the turn is but the sentiment part is upon us. The rest may not lie far away as well. ***** VIX Tuesday 10/10 close; 27.44 30-yr Bonds Tuesday 10/10 close; 5.83% Support/Resistance Indicator The Index Support/Resistance(S/R)Ratio is a formula used to gauge possible support or resistance based on open-interest disparity. Ratio listed is percentage of calls to puts or puts to calls respectively. Support is factored from dividing puts by calls at strike levels beneath index closing price. Resistance is factored from dividing calls by puts at strike levels above current closing price. Tuesday (10/10/2000) (Open Interest) Calls Puts Ratio S&P 100 Index (OEX) Resistance: 775 - 760 12,257 11,202 1.09 755 - 740 4,225 19,847 .21 OEX close: 737.68 Support: 735 - 720 68 16,111 236.93*** 720 - 700 77 11,477 149.05*** Maximum calls: 770/4,541 Maximum puts : 750/9,927 Moving Averages 10 DMA 757 20 DMA 769 50 DMA 795 200 DMA 782 NASDAQ 100 Index (NDX/QQQ) Resistance: 87 - 85 15,511 25,448 .61 84 - 82 9,390 20,223 .46 81 - 79 3,029 23,293 .13*** QQQ(NDX)close: 78.125 Support: 77 - 75 381 12,412 32.58 74 - 72 74 4,745 64.41*** 71 - 69 122 2,839 23.27 Maximum calls: 78/20,2590 Maximum puts : 80/14,565 Moving Averages 10 DMA 85 20 DMA 88 50 DMA 92 200 DMA 94 S&P 500 (SPX) Resistance: 1450 12,719 11,387 1.12 1425 8,782 14,850 .59 1400 2,422 11,322 .21 SPX close: 1385.94 Support: 1375 1,004 14,413 14.36 1350 523 22,943 43.87*** 1325 378 7,567 20.02 Maximum calls: 1475/21,156 Maximum puts : 1350/22,943 Moving Averages 10 DMA 1429 20 DMA 1444 50 DMA 1470 200 DMA 1447 ***** CBOT Commitment Of Traders Report: Friday 10/06 Biweekly COT report discloses positions held by small specs and commercial traders of index futures contracts on the Chicago Board Of Trade. Small specs are the general trading public with commercials being financial institutions. Commercials are historically on the correct side of future trend changes while small specs are not. Extreme divergence between each signals a possible market turn in favor of the commercial trader’s direction. Small Specs Commercials DJIA futures Open Interest Net Value 848 -753 Total Open Interest % (12.82% net-long) (5.15% net-short) NASDAQ 100 Open Interest Net Value -204 -708 Total Open Interest % (1.22% net-short) (2.10% net-short) S&P 500 Open Interest Net Value 50277 -57890 Total Open Interest % (29.17% net-long) (9.76% net-short) What COT Data Tells Us: Commercial positions in S&P 500 and DJIA remain at or above five-year extreme short levels. Small specs continue to build net-long extremes in SP00S but have given ground in DJIA and switched over to net- short in NDX. (Not Shown) Commercial positions in 10-Year Note and 30-Year Bond markets at or near five-year extreme net-short levels. Small specs build net-long. Summary: "Smart money" insiders expect stock market to decline and interest rates to rise. Small traders directly opposite, creating diverse set up favoring commercial sentiment for future market direction. *Data compiled on 10/03 by COT (Canadian Dollar commercial traders entering five-year extreme net-long positions. Expect this currency to rally, possibly mild affect on U.S./Canadian based-companies in trade exchange). Bullish: Fed's finished Benign government reports Disparity in overhead call/put ratios Bearish: Oil Prices (falling) COT reports Recent pre-warnings, downgrades (brutal) Broad market's break of critical M/A support Market leaders breakdown ************** MARKET POSTURE ************** As of Market Close - Tuesday, 10/10/2000 Key Benchmarks Broad Market Last Support/Resistance Alert **************************************************************** DOW Industrials 10,524 10,450 10,900 ** SPX S&P 500 1,385 1,360 1,445 ** COMPX NASD Composite 3,240 3,150 3,650 ** OEX S&P 100 737 735 770 RUT Russell 2000 481 470 510 ** NDX NASD 100 3,188 3,150 3,500 ** MSH High Tech 870 860 950 ** BTK Biotech 675 650 740 XCI Hardware 1,173 1,155 1,310 ** GSO.X Software 395 385 445 SOX Semiconductor 706 650 870 ** NWX Networking 1,120 1,090 1,210 ** INX Internet 406 385 465 BIX Banking 573 560 610 ** XBD Brokerage 584 555 640 ** IUX Insurance 752 735 790 RLX Retail 789 765 835 DRG Drug 413 370 425 HCX Healthcare 851 825 860 XAL Airline 141 138 152 OIX Oil & Gas 320 296 332 Eleven alerts were triggered over the past two sessions, all at support levels. Lowering support (DOW, SPX, COMPX, RUT, NDX, MSH, XCI, SOX, NWX, BIX, XBD) Lowering resistance (COMPX, RUT, NDX, MSH, BTK, XCI, SOX, INX, BIX, and XBD) The DRG, HCX, and OIX have been benefiting from a defensive market and are three sectors that had triggered alerts at resistance within the past month and haven’t violated support levels. ************** TRADERS CORNER ************** Another High-Potential Sector to Watch: Power Chips By Scott Martindale Are we there yet? Was that the "thud" of a market bottom? All the bulls seem to think we’re close. I’m certainly ready for that Fall rally. I never seem to make the same money playing the downside like I do on the upside. On Sunday, Jim wrote about John Dessauer’s picks and gave recommendations on playing long-term options on them. I’ve always liked what John has to say, and I subscribed to his service for a long time, but I’ve generally selected the wrong recommendations, like RAD, CBR, and CD. I really got burned when I backed up the truck on Rite-Aid by selling naked puts and taking the stock. I got out of most of my positions on the way down. Nevertheless, I intend to buy more if and when it starts to come back. I still hold some Rite-Aid 2002 bonds that I bought for their 40% effective annual yield if held to maturity (and RAD stays solvent). [It is now looking like it has finally bottomed.] Despite the past unfortunate selections, I intend to enter some of Jim’s combination plays on Dessauer’s stock picks this month. Over the past few weeks I’ve written about a couple of hot, volatile sectors that might be fun and profitable to play, i.e., fuel cells and superconductors. Today I’ll talk about another new-technology sector: Power Chips. First, what is a Power Chip? They are the semiconductors designed to regulate electricity in an appliance to give the item a cleaner source of power. In the computing arena, unstable power can cause problems that can throw off calculations which in turn causes crashes and, in the most severe cases, can damage sensitive and expensive electronic components. Power semis help electric sources meet these needs for pure energy in information technology equipment to ensure that this high-end technology works reliably. Within the circuits of a high-tech appliance you find gatekeepers at the circuit level like diodes and thyristors as the energy is converted from AC to DC and then guided throughout the appliance as orderly as possible where other types of power chips control the flow of electrons. Depending on the efficiency of the switches, electrical surges and spikes may enter the appliance, but the item may be able to withstand them without incident. Now many of these new "appliances" are always-on, system-critical, and highly-sensitive, like servers and routers. They need a more pure, reliable and stable form of energy (say, 99.999% reliable) to meet their needs. Power semiconductors are finding their way into many common items in the automotive, computer, lighting and telecom industries. They are used to regulate power conversion, toggle electrical loads on and off, regulate electrical flow, or distribute electrical loads. They provide orders of magnitude improvement in the speed of the electrical switches to give today’s faster circuits the access to pure power. The power chip market is expected to grow to $12 billion by 2002. Players in the power chip space include National Semiconductor (NSM), Vishay (VSH), Semtech (SMTC), Mitsubishi, Advanced Power Technology (APTI), International Rectifier (IRF), and IXYS Corporation (SYXI). NSM, VSH, SMTC, and Mitsubishi are large, established firms that offer a broad range of electronic components for applications in information appliances, consumer electronics, personal systems, wireless communications, flat-panel and CRT display, power management, local and wide area networks, automotive, consumer and military aerospace markets. However, the previously tightly-integrated semiconductor industry has broken out into many new specialized companies with very refined core competencies. APTI, IRF, and SYXI are focused on power semis, and they are also smaller and more speculative. APTI is the new kid on the block making high-performance semis that condition and regulate electricity in computers, cellular base stations and other electronic devices. SYXI makes power semis and power modules to convert and control power in items like motor drives, uninterruptible power supplies and medical devices. IRF, the leading power chip company, makes semis that refine electricity coming from wall sockets or batteries to help electronics run more efficiently and can be found in appliances, autos, computers, lighting and communication products. Of the three, only IRF is currently optionable. IRF and SYXI have similar price patterns; however, if you look at the charts, SYXI is much more explosive, and you can play the stock at a reasonable cost since it currently trades around $25. As the biggest player, IRF gets most of the business and makes most of the press releases. In July, they announced a 900% increase from the prior year in fourth quarter profits. Over the past few weeks, they have put out a spate of press releases on new products and partnerships. Nonetheless, the price pattern generally tracks the Nasdaq rather than the news. When good announcements and favorable market conditions provide the impetus for a little momentum run, consider buying more than one call so that you can take some profits along the way without having to completely exit the play. As the stock runs on the news, you’ll want to lock in some gains or move up your sell stops. Of course, another way to benefit is to buy the stock on weakness (including the non-optionable ones) and just wait for the next move to happen. Power chip stocks are not so speculative as the alternative fuel and superconductor stocks I’ve written about recently (IRF has a P/E of only 35). And they are not quite so news driven, so you shouldn’t see the rapid gap-up/gap-down behavior. The technology is on the market and affordable. With growing demand for the many products that require highly sensitive and reliable power management, power chip stocks have some big upside potential within a strong tech market. ****** We Asked For Volatility and Now It's Here By Mary Redmond It seems that every reaction in today’s market is an exaggerated reaction. If an analyst upgrades a stock, it can jump 20 points in one day. If a company warns that its earnings might be a few cents below expectations, then its market value can get sliced in half in one day. In addition, upgrades and downgrades impact other stocks in the sector. We saw an example of this today in the chip sector. The market overreacts to statements made by the Federal Reserve in a particularly volatile manner. During the first few rate hikes of 1999, the investment community put such an emphasis on the bias of the Fed that the markets would frequently move as much as 100 or 200 points just because of the bias. This is probably why the Fed eliminated the bias. The Federal Reserve generally does not like excessive market volatility. It's just one more thing for them to worry about. So, during the last Fed meeting the members of the Fed may have been thinking to themselves, "if we leave rates alone and state that we feel it is important to keep a vigilant watch on inflationary tendencies, then the markets probably won't move much. If we leave rates alone and give an indication that our bias may have been changed to neutral, the markets may explode to the upside. Let's pick the stance which will be most likely to cause less volatility." The interpretation of this stance was that the Fed thought that they might not have fully eliminated inflation, and in the worst case, could raise rates again. The markets proceeded to fall apart last week. If the Fed had given an indication they were neutral, would the markets have rallied? We'll never know, but perhaps the most important thing to remember is that the statements made by the Fed are probably designed to cause as little market volatility as possible. It is interesting to examine a stock's chart in comparison to the implied volatility of the stock's options, as this can be indicative of how implied volatility moves as the price changes. Think of options trading like skiing - the steeper the slope, the more dangerous the option. This can mean if a stock has a chart which has recently made a sharp, steep move up or down the implied volatility of the options is likely to be high. It is generally best to try to buy options which have low implied volatility compared to the stock’s historic volatility. The ideal time to buy an option is when it has been almost flat, and you expect a huge move. Situations like this can be hard to find in today's market. Many people have bought options on fast moving technology stocks and watched the options decline dramatically while the stock declined only a few points. This can be partly because the implied volatility of the options was so high that the probability of the option rising was very low. If you are bullish on a stock which has options with high implied volatility, it can often be profitable to sell puts or use a put credit spread. Naked puts are highly risky in today’s market, but sometimes put credit spreads can be highly profitable, as a put will often decline more rapidly than a call will increase if a stock rises. Monday was the type of day that day traders dream about. The Nasdaq had a complete collapse accompanied by a spike in the VIX.X to 27, which is higher than it had been in months. Then, a number of key tech stocks, including JNPR, which is due to release earnings this week, showed a rising stochastic chart pattern which indicated a very high probability of the stock moving higher. Brave traders who dared to buy at $180 could have sold the stock for over $208 later in the day. A more conservative trade would have been to buy at $185 and sell at $199. In fact, there have been excellent day trading opportunities both Monday and Tuesday for nimble day traders who could get in and out of positions within minutes. These opportunities will probably continue over the next few weeks. However, we may need to wait a little longer until traders and investors feel comfortable buying and holding technology stocks, since they have been burned so badly this year. Many market analysts have been noticing that the Nasdaq leaders like Microsoft, Cisco, and Intel have lost a large percentage of their market capitalization in the last several months. At the same time, many of the mid-cap networking and technology stocks have presented tremendous trading opportunities, as they are starting to attract almost as much money as last year’s market leaders. This could be partly attributed to traders’ boredom and frustration with the very large capitalization tech stocks. ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=640 ************************************************************** *********** OPTIONS 101 *********** The School of Hard Knocks By David Popper There I was, fully invested in the best stocks in the universe including DELL, MSFT, CSCO, TXN, etc. I thought that I was on the verge of making a lot of money because for the first time I was fully margined. True, I could have made more money if I had purchased these stocks at a sound entry point. Unfortunately when an entry point was available, the stock had dipped and I was too new to understand the gift being presented. After the issue bounced off of support and raced ahead 20% I purchased the stock because it was a rocket that had "proved" itself to me. Somehow I felt safer buying these winners. The day was August 31st, 1998 and over the course of the next two days, I was going to learn some very expensive and valuable lessons. As you may recall, August 31st and September 1st of 1998 were classic climax selling days which caused the Nasdaq to drop more than 500 points before reversing sharply in the afternoon of September 1st. This formed the bottom which began a powerful 30 day rally. During these days I felt panic as the market dropped, relief when I sold, and utter disillusionment when the market reversed after I sold. I realized that had I stayed in the market, my losses would have been erased. I realized that if I had purchased the stock correctly, I would have made money. I finally realized that if I had been a panic buyer instead of a panic seller, I could have made a year's worth of profits in only one day. Yes, there was more to this game than just picking stock. I realized that there were rules to this game and if I was going to be successful, I had better learn these rules. I realized that this was not a one time event, and I had better play this situation better the next time. Below I will discuss some of the lessons that I have learned. 1. ONLY TRADE THE TOP STOCKS Institutions have certain favorites. These favorites are often bought on dips. Flashy stocks without earnings simply do not survive the hard times. You can rest assured that institutions will buy the generals like SUNW, CSCO, and ORCL on dips. I would not bet the farm on KOOP, KTEL, KREM, or MSTR however. 2. ONLY TRADE STOCKS THAT ARE ON THE CUTTING EDGE Technology is changing fast. What was cutting edge 2 years ago is simply a commodity, or worse, obsolete now. Remember those traders that used to exclaim in the chat rooms that they would keep AOL and Dell forever? Well, at the time it seemed that the party would never end, but it did end. Computers and the net are not the rage, broadband replaced it. Will broadband last? Only until the next technological breakthrough occurs. 3. MONITER THE QUALITY OF YOUR STOCK ON A MONTHLY BASIS Love may last forever, but even stocks in cutting edge areas may falter. Consider LU for a moment. LU was a market darling in the early 1990's. The LU management wisely noticed that the fiber optic market was white hot and LU entered the arena. For whatever reason, LU has not fared well. Virtually every stock in this sector is doing well except LU. LU is now at a 52 week low. It is important to monitor your stocks on at least a monthly basis in order to avoid being stuck with a has-been. Inasmuch as my strategy of choice is covered call writing, I am compelled to evaluate my holdings on a monthly basis. 4. ONCE YOU HAVE SELECTED QUALITY STOCKS, DO NOT SELL INTO A GENERAL MARKET PANIC When markets panic, as they occasionally will do, do not panic. Institutions will view this as a buying opportunity and will purchase quality stock at a discount. When the market rallies, often quality stocks rapidly reach new highs, while lesser stocks continue to wallow. DELL reached an intra day low of $40 on September 1st, 1998 and was double that price within 30 days. Just the same, INTC had some bad news which may have some relevance to box makers and DRAM chip producers, but it does not have any meaning to other areas of technology. On such a downturn, other good issues from other dynamic sectors may experience an initial plunge, only to roar back. It would be better to be a buyer on such dips, not a seller. Peter Lynch once said that more money is lost in preparing for corrections than would have been lost in the correction itself. Again, owning quality stocks is the best defense to corrections. Next week I will discuss other lessons learned the hard way in 1998. ************* DAILY RESULTS ************* Index Last Mon Tue Week Dow 10524.40 -28.11 -44.03 -72.14 Nasdaq 3240.54 -5.45 -115.02 -120.47 $OEX 737.68 -6.74 -6.55 -13.29 $SPX 1385.94 -6.96 -16.09 -23.05 $RUT 481.63 -1.49 -7.90 -9.39 $TRAN 2497.23 -53.02 6.60 -46.42 $VIX 27.44 0.66 1.11 1.77 Calls CIEN 114.66 -0.25 4.34 4.09 Late-day recovery QCOM 79.69 1.56 0.31 1.88 Strength in bear market LLY 84.50 -0.25 1.81 1.56 Safety in pharmas SEBL 93.81 7.75 -6.38 1.38 Relatively higher lows MRK 76.88 -0.75 1.56 0.81 New, close to breakout NT 60.00 0.94 -3.25 -2.31 Watch out for LU warning CHKP 154.25 2.94 -6.50 -3.56 Consolidating on less vol ADBE 143.69 2.06 -6.00 -3.94 Dropped, fell apart SUNW 103.19 -0.69 -3.63 -4.31 New, earnings run!!! MERQ 124.50 2.16 -20.66 -18.50 Dropped, bulls in hiding Puts CRA 66.25 -8.06 -5.06 -13.13 Breakdown on big volume JBL 42.06 -4.38 -4.81 -9.19 Thank you Dan Niles! AETH 75.81 -2.56 -3.88 -6.44 Increasing weakness JPM 146.75 -1.13 -5.13 -6.25 New, fears adding up QLGC 70.75 3.13 -6.63 -3.50 No news is bad news CPTH 49.69 2.63 -3.69 -1.06 Reprieve or entry point? INKT 90.63 5.50 -5.88 -0.38 Biding time above $90 DIGX 38.19 1.19 0.06 1.25 Dropped, found bottom AKAM 41.75 7.75 -2.19 5.56 Institutional selling PICKS WE DROPPED **************** When we drop a pick it doesn't mean we are recommending a sell on that play. Many dropped picks go on to be very profitable. We drop a pick because something happened to change its profile. News, price, direction, etc. We drop it because we don't want anyone else starting a new play at that time. We have hundreds of new readers with each issue who are unfamiliar with the previous history for that pick and we want them to look at any current pick as a valid play. CALLS: ***** MERQ $124.25 -20.66 (-18.50) Monday provided aggressive traders with a quick and profitable trade as a morning dip found buyers stepping in at $132, just above strong support at $130. Bouncing strongly, the stock spent the remainder of the day heading higher to close at $145.17, up $2.17. While volume was light, traders who bought into the dip were amply rewarded. Today however, the buyers were nowhere to be found as MERQ neared $130. A half-hearted bounce was quickly denied as the stock violated its key support level. Selling volume accelerated into the close and by the day's end, MERQ finished down over 14% on heavy volume. The stock may find support near its 50-dma, currently at $121.14 but former support at $130 now becomes formidable resistance. As a result we are closing the play. ADBE $143.69 -6.00 (-3.94) After a decent Monday trading session, ADBE fell apart with the broader tech index today. Along the way, the stock violated the $145 area that it desperately held onto in Monday's trading. The entire NASDAQ is being swept up in the selling as investors wait for the "capitulation" to come. But until that moment comes, tech stocks continue to bleed, including ADBE. Although ADBE managed to bounce from $140, we are dropping it tonight because of its pattern of lower highs and the overall negative market sentiment that even the most resilient cannot seem to buck. PUTS: ***** DIGX $38.19 +0.06 (+1.25) It's been lucrative to play DIGX as it steadily slid towards all-time lows on takeover and merger news. However, the stock is currently finding a bottom at the $36 to $38 price levels. The bargain hunters were apparently lured by the attractive share price. Recall, DIGX has lost over 56% of its value during its recent descent. Digex is also scheduled to release 3Q earnings on October 26th during a conference call from 9am to 10am EST and this could also be generating some interest. Since it's best to exit with profit, we dropping DIGX from our put list this evening. ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=648 ************************************************************** FREE TRIAL READERS ****************** If you like the results you have been receiving we would welcome you as a permanent subscriber. The monthly subscription price is 39.95. The quarterly price is 99.95 which is $20 off the monthly rate. We would like to have you as a subscriber. You may subscribe at any time but your subscription will not start until your free trial is over. To subscribe you may go to our website at www.OptionInvestor.com and click on "subscribe" to use our secure credit card server or you may simply send an email to "Contact Support" with your credit card information,(number, exp date, name) or you may call us at 303-797-0200 and give us the information over the phone. You may also fax the information to: 303-797-1333 ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
The Option Investor Newsletter Tuesday 10-10-2000 Copyright 2000, All rights reserved. 2 of 2 Redistribution in any form strictly prohibited. To view this email newsletter in HTML format with embedded charts and graphs, click here: http://www.OptionInvestor.com/htmlemail/101000_2.asp ************************Advertisement************************* Tired of waiting on trades to execute? Does your broker offer Stop Losses on Options? Trade instantly with Stop Losses at Preferred Capital Markets Stop Losses based on the option price or the stock price. Move your trading into the next millennium with Preferred Capital Anything else is too slow! http://www.sungrp.com/tracking.asp?campaignid=641 ************************************************************** ******************** PLAY UPDATES - CALLS ******************** QCOM $79.69 +0.31 (+1.88) The strength that lifted QCOM from the $60 level in September continues to thrive in this bearish environment. The recent resurgence brought the stock through the crucial $80 level and there appears to be more upside to come. With CDMA back in the picture in China and good news on the Korean front, the prospects for QCOM look good. Pet Peterson at Prudential Securities recently commented that QCOM was close to signing a deal with China for the company's CDMA technology. Several other events on the Asian front could act as positive catalysts for our play. This includes news that China Unicom (CHU), a telecommunications company with over 14 million subscribers, may use QCOM's CDMA technology for a wireless market. And in Korea, good news came from Ahn Byung Yub, when the Minister of Information and Communication made it clear in a press briefing that QCOM's would face less competition. With billions of dollars at stake, it's likely the stock will return to the limelight. It's becoming more evident that institutional investors likely share this sentiment, which is dictated by the recent volume levels. Depending on your risk portfolio, this week's trading offered a variety of entries into this momentum play. The pullback yesterday provided lower entries at near-term support around $76-$77 and the 10-dma line. Today's strong break over $80, on the other hand, provided a more conservative entry. In the coming sessions, look for the $80 level to evolve as support and confirm the recent strength CIEN $114.66 +4.34 (+4.09) The share price is currently struggling to break to the upside of $120 and maintain the upward momentum that took it to a new 52-week high of $136.25 on September 25th. In today's session though, CIEN made a good run as its sector mostly advanced. The volume increased on the upswing and overall, trading activity was at almost twice the ADV. This is definitely a bullish indication that CIEN can meet the challenge at near-term resistance at $120. CIEN is presently sandwiched between the 5-dma at $113.47 and the 10-dma at $117.47. It's very risky to jump in on dips at the 30-dma at $111.39. Consider taking a more cautious approach and enter into new positions only after CIEN breaks to the upside of its primary trading channel between $110 and $120. CIEN may be on of the "hot" opticals, but nothing's a guarantee in this shaky market. Keep stops tight. CHKP $154.25 -6.50 (-3.56) CHKP participated in the massive Tech rebound yesterday, which carried the stock back above the $160 resistance level. However, CHKP's rally began to fizzle as the stock approached the $165 level. The wavering action in the NASDAQ towards the end of trading yesterday was the highest hurdle preventing CHKP from advancing above $165. The NASDAQ was to blame for CHKP's retreat today too! CHKP slipped back below the $160 level, and finished under the 10-dma at $156.50. Volume has steadily declined over the past four trading sessions as CHKP has churned around its 10-dma. The sideways trading in CHKP could lead to another explosive intraday rally once the NASDAQ decides to stabilize. Aggressive traders might continue using quick rallies above the 10-dma, now at $156.50, or pops above the $160 level to take quick profits from CHKP. The more conservative traders need to practice patience and wait for the NASDAQ to grow rally legs and target shoot for entry when CHKP advances strongly above the $165 level. SEBL $93.81 -6.38 (+1.38) SEBL bucked the NASDAQ bears yesterday with great gusto. As highlighted in the Play of The Day, SEBL rose substantially higher on volume that indiicated the move had staying power. However, much to our shagrin, the NASDAQ bears got their paws around SEBL today and clawed the stock back down. However, although SEBL pulled back today, it was encouraging to see the stock trace a relatively higher low at $93. Before the bulls claim victory, though, SEBL needs to rally significantly above the critical $100 level on convincing volume. The $100 area has been allusive for over a weak now, and could mark a significant turning point should SEBL hurdle the level. While the conservative traders might wait for SEBL to cross the $100 level, aggressive traders might consider taking entries on bounces off the $93 support level or target shooting on quick rallies back above the $95 level. No matter the entry strategy, watch the direction of the broader Tech sector by monitoring the NASDAQ. Use SEBL's competitors ORCL, MSFT, and ITWO to gauge direction in the Software sector. LLY $84.50 +1.81 (+1.56) Traders and investors alike are running to the drug stocks for shelter, and for good reason. This is one of the few sectors which analysts are maintaining a positive outlook for earnings. Analysts are bullish on the sector, with Parker Hunter analyst Richard Lawrence recently noting that pharmaceuticals have a good probability of achieving high growth objectives. Merrill Lynch also came out with positive comments, saying that it expects drug companies to report earnings above Wall Street estimates. Add to that a stellar earnings report from Abbott Labs today as well as comments from Chase H&Q analyst Alex Zisson on drug stocks as a "safe place to be" and it's no wonder why drug stocks continue bucking the downtrend. At this point, conservative traders will be watching for LLY to break above $85 on strong volume for an entry. Aggressive traders looking to enter on a pullback could target shoot a bounce off the 5- or 10-dma (at $83.47 and $82.45). NT $63.56 +0.19 (+1.25) During NY trading, NT actually pounded out a gain in the face of another NASDAQ sell-off. But, thanks to another earnings warning from LU, NT felt the heat in after-hours trading and finished the day at $60. Almost every tech issue was down in after-hours as the negative sentiment continues to grow. The market environment has become increasingly difficult, and NT Has come under pressure. We are looking for a bounce from $60, yet in extreme market conditions, panic sellers do not discriminate. Therefore, we suggest using caution in entering new plays. If the bulls do show up tomorrow to defend NT, aggressive traders could take a bounce of the $60 level. However, make sure NT rebounds from support at that level before adding new call positions and confirm positive direction in the NASDAQ. A more conservative entry might be gained if the bulls carry NT back above its 10-dma near $63. ******************* PLAY UPDATES - PUTS ******************* AETH $75.81 -3.88 (-6.44) An early slide below $80 and a failed attempt to break above $88 in Monday's session demonstrated the stock's increasing weakness. If you missed jumping on board on the strong bounce towards previous support at $90, then there were plenty of opportunities to buy into the downtrend as AETH continually bumped its head on the 5-dma ($83.55) line. The dramatic sell-off on accelerating volume at the end of today's session is hopefully a precursor to succeeding losses. There is some historical support at the current level, if you date back to the first months of the stock going public in the fall/winter of 1999. However with the 52-week low at $41.13, there is plenty of room to freefall. Besides the recent release of 24 mln shares into the market following the lock-out period, this is purely a snowballing momentum trend. QLGC $70.75 -6.63 (-3.50) No news is not necessarily good news for QLGC. The stock is literally taking a beating in this bearish marketplace. When the NASDAQ tanked at the beginning of September, QLGC fell from the grace of its investors. The stock is currently down $48.50, or 41%! With the volume of earnings warnings and downgrades within its sector, there's certainly potential for QLGC to move deeper. And from today's negative performance, it appears it could do just that. The 100-dma, now at $78.71, is still serving as the upper resistance on attempted breakouts. This technical line provides the measurement for solid entries. But where's the bottom? Well, while today's close smack on the daily low is definitely a sign of weakness, a move through this mark would provide confirmation that the downward momentum can take QLGC lower. The next level of support is found at $60. The company is confirmed to report earnings on October 18th, after market close. AKAM $41.75 -2.19 (+5.56) Akamai said yesterday morning that it had teamed with Novell (NOVL) to provide Web content delivery services. The news of the alliance spurred Thomas Weisel to upgrade AKAM from a Buy rating to a Strong Buy. The momentum induced by the Thomas Weisel upgrade caused AKAM to gap above the $45 level this morning. Interestingly, Merrill Lynch downgraded AKAM later this morning, which sent the stock into freefall. AKAM lost nearly $8 on 1.5 mln shares, all in just thirty minutes of trading. Additional institutional selling could be the catalyst we need to take our put play further into profit territory. The $40 level has provided solid support for AKAM over the past two days, and will be the pivotal point to gain new entries into the play. Watch for a failure at $40, and make sure to confirm any decline with heavy volume as a sign the institutions are selling. The aggressive traders might look to a rollover near $42.50 or higher around the $45 level to gain new entry into the play. CPTH $49.69 +3.69 (-1.06) Investors in CPTH got a temporary reprieve yesterday as the stock managed to move higher to start the week. The first half of the day was spent trading sideways in a tight range but by mid-day, it broke out of that range and headed higher. While CPTH closed modestly higher, volume was light, clocking in at only 60% of the ADV. What's more, the stock closed below 5-dma resistance, now at $53.46. Today, CPTH attempted to build on Monday's gains in the early going but resistance at the 10-dma, now at $55.62, combined with weakness in the NASDAQ, was too strong. This brought in the sellers near the end of the day, and by the close, CPTH lost almost 7%. Volume was once again light, at 60% of ADV but the end of day selling came with more conviction. Now below $50 support, a bounce off that level, or the 5- and 10-dma could provide for an entry point. Conservative traders could watch for a break below $48 support with volume. CRA $66.25 -5.06 (-13.13) The technical picture for CRA is looking bleak, which is good news for our put play. Ever since the start of the month, the stock has been heading ever lower on accelerating volume. Already below its major moving averages, the past couple of days in trading have been a continuation of that trend. On Monday, CRA dropped $8.06 or over 10% on almost 1.3 million shares. Today the selling continued, with CRA shedding another 7.1%, this time on almost 1.6 million shares. The 5-dma (now at $77.61) continues to act as resistance. With the break below $70 support, a trip to $50 is quite possible but there will be support for CRA in increments of $5 starting at $65. Look for a failure to rally above $70 or the 5-dma for an aggressive entry point. If CRA continues to head lower, look for an entry on a break below $65 but confirm with volume. With the Merrill Lynch Biotech HOLDR (BBH) now below its 200-dma, momentum in biotech issues is clearly negative. JBL $42.06 -4.81 (-9.19) The 5-dma continues to act as formidable resistance for JBL. On Monday, the stock opened near the 5-dma and proceeded to sell off. Bouncing near the $45-46 area, the stock attempted recovery but encountered resistance at the $50 mark. Today, in sympathy with the Semiconductors, JBL gapped down at the open below $45-46 support and spent the remainder of the day heading deeper into the red, closing down over 10% on over twice the ADV. Today's close puts JBL below its last line of moving average support, the 200-dma at $44.50. There is much overhead resistance for JBL including the $45-46 area, and the 5-dma near $48.50. A failed rally above resistance would be an aggressive entry point but only if the sellers come out in force. Support for JBL can be found in increments of $5, at $40 and then $35. Look for a break below $40 on volume as a conservative entry point. INKT $90.63 -5.88 (-0.37) Our Sunday play description suggested two entry scenarios for INKT. It was a toss of the coin, as both entry points have now been in play. INKT did break below the $90 support level Monday, however, investors had to be nimble and trail profits with stops, as many saw the $84.38 low as an entry point and INKT traded up the remainder of the day. Our second opportunity to short INKT occurred today, but it was off the resistance level at the 10-dma. INKT rolled over at $102.38, which occurred early this morning and proved to be the day high. Investors should note that $90 is proving to be support now, so use stops accordingly. The overall trend and momentum with INKT remains negative, and with the NASDAQ dropping daily, traders can use the negative market to their advantage. No news is good news in our short stance on this stock as INKT's weak fundamentals and the market will move the play. Since INKT now sits at support once again, investors can look for breaks below $90 as playable as well as rollovers near resistance above at $95 and higher near around $100. ************************Advertisement************************* Attention Online Traders: NobleTrading.com has become the first online trading firm to offer both Direct Access Trading, and web based trading to its customers. Trade Direct using any ECN, SOES, and SelectNet, or trade right through your browser using our web based trading application. FREE DSL service for active traders. Visit our website and sign up for a Free real-time demonstration! http://www.sungrp.com/tracking.asp?campaignid=649 ************************************************************** ************** NEW CALL PLAYS ************** SUNW - Sun Microsystems $103.19 -3.63 (-4.31 this week) Sun Microsystems is a self contained giant. They not only provide the world with UNIX based servers and work stations, but they also provide their own peripherals. Among these are (Solaris) operating systems, (SPARC) chip components, and the now famous Java technology that much of today's software incorporates. This allows for any system to have uniform and compatible running capability. SUNW is poised to continue its aggressive growth as it focuses on the telecommunications industry now. Last Thursday, Thomas Weisel supported their Buy rating on SUNW, stating that the company is ready to rock. This opinion is due to the strong business plan and systems and storage components that help fuel SUNW in their fourth quarter. The analysts look for SUNW to reach a target now of $132 based on projections. They also indicate that this positive combination of position and components is good to hedge a rough market. SUNW's chart is confirming this opinion. Since the news was released, SUNW has held good support at $103. The stock's 100-dma support level hasn't been tested since mid July, and now that it's come back into play, it is again supporting the stock nicely. Since the NASDAQ turned for the worse, the 100-dma level has buoyed SUNW and provided for wide intraday rallies. Since we are very close to testing a 3200 low in the NASDAQ, many investors expect a rally attempt off this mark. As this occurs, SUNW is poised nicely to participate in a rebound at least to its resistance mark at $115. Earnings will also come into play on this stock. We are now only eight trading days away from the confirmed announcement on Oct 19th. This is a good time to enter for earnings run participation. With positive market support, investors should look for SUNW to bounce off the $103 area. Wait for the market to confirm direction before entering new plays by monitoring the action in the NASDAQ. SUNW appears to be the superman of this holiday season. Today, they introduced the Crypto AcceleratorI. A board that will supercharge the speed and accessibility of e-Commerce sites for the unprecedented online shopping that is expected. In the above briefing, we mentioned that these systems help boost fourth quarter sales for SUNW. This is an example. Six new companies also qualified today with SUNW to become part of the systems iForce side. This force provides ebusiness solutions to costumers, another high demand area this time of year. ***October contracts expire next week*** BUY CALL OCT-100*SUX-JJ OI= 7071 at $8.00 SL=5.75 BUY CALL OCT-105 SUX-JA OI=14576 at $5.25 SL=3.25 BUY CALL NOV-105 SUX-KA OI= 2064 at $9.13 SL=6.25 BUY CALL NOV-110 SUX-KB OI= 1142 at $7.13 SL=5.00 BUY CALL NOV-115 SUX-KC OI= 3734 at $5.25 SL=3.00 SELL PUT OCT-100 SUX-VJ OI=10560 at $4.63 SL=2.75 (See risks of selling puts in play legend) Picked on July 25th at $103.19 P/E = 107 Change since picked 0.00 52-week high=$129.31 Analysts Ratings 11-9-1-0-0 52-week low =$ 43.78 Last earnings 07/00 est= 0.33 actual= 0.39 Next earnings 10-19 est= 0.25 versus= 0.17 Average Daily Volume = 14.94 mln MRK - Merck & Co $76.88 +1.56 (+0.81 this week) Merck is a global pharmaceutical company, which specializes in the development of human and animal health products. They are the #1 industry leader in the US and #2 worldwide. Some of its more prominent drugs include Zocor and Meycaor (cholesterol drugs), Pepcid (an anti-ulcerant), top-selling hypertension drugs, Vasotec and Prinivil, and more recently the AIDS medication, Crixivan. The drug maker also provides pharmaceutical benefit services through Merck-Medco Managed Care which it sells to corporations, labor unions, and insurance companies. Investors are running scared from the techs and taking shelter in the valued drug stocks. According to an analyst at investment and research firm Parker Hunter, "people are moving to pharmaceuticals because of their consistency and high probability of achieving their growth objectives". As a leading manufacturer with a solid business model and strong sales record, MRK has attracted many buyers. The active trading has sent the stock through tough resistance at $75 and positioned it for a strong run into earnings. Consider taking entries off the intersecting 5 and 10 DMAs at $75.43 and $74.56, respectively. This level should support any future consolidation. A move below $73 should raise your warning flags. If robust volume continues to drive the price higher, expect to meet formidable resistance at $80 and $81.13, the 52-week high. A move through this opposition would open the door for strong upside action. But mark your calendars, there's only seven sessions to trade the momentum. The company is confirmed to report on October 20th, BEFORE the market opens. Merck recently announced that its drug, Fosamax, was approved by the FDA for treatment to increase bone mass in men with osteoporosis. This medicine is the first of its kind. It's projected that the number of men with osteoporosis will increase approximately 20% by the year 2015. ***October contracts expire next week*** BUY CALL OCT-70 MRK-JN OI= 7783 at $7.38 SL=5.50 BUY CALL OCT-75*MRK-JO OI=12862 at $3.00 SL=1.50 BUY CALL NOV-70 MRK-KN OI= 3239 at $8.50 SL=6.00 BUY CALL NOV-75 MRK-KO OI= 4991 at $4.75 SL=2.75 BUY CALL NOV-80 MRK-KP OI= 3136 at $2.25 SL=1.00 Picked on Oct 10th at $76.88 P/E = 29 Change since picked +0.00 52-week high=$81.13 Analysts Ratings 8-11-10-0-0 52-week low =$52.00 Last earnings 06/00 est= 0.69 actual= 0.73 Next earnings 10-20 est= 0.73 versus= 0.64 Average Daily Volume = 4.60 mln ************* NEW PUT PLAYS ************* JPM - J.P. Morgan & Co. Inc. $146.75 -5.13 (-6.25 this week) J.P. Morgan is a leading global firm that meets critical financial needs for business enterprises, governments, and individuals around the world. They advise on corporate strategy and structure, raise capital, make markets in financial instruments, and manage investment assets. Their expertise is based on an in-depth knowledge of their clients' needs and the industries and environments in which they operate. They also commit their own capital to promising enterprises and invest and trade to capture market opportunities. After a rough spring and early summer, shares of JPM and other leading financial stocks have been rallying off their June lows, thanks to consolidation in the industry and the expectation of no more rate hikes from the Fed. But now, with hawkish comments at the most recent FOMC meeting and Friday's report that the jobless rate has hit a 30-year low, interest rate worries have resurfaced. This does not bode well for the financials. Fears of a weak euro are also conspiring to lead JPM lower, as the company derives a large part of its revenues from its European subsidiaries. More recently, rumors surfaced that Morgan Stanley Dean Witter had lost a substantial amount of money in junk bond trading, which did not help the bank stocks. Add to that concerns about credit quality and a slumping NASDAQ cutting into earnings for security firms and it is no wonder that financial stocks have headed lower. The technical picture confirms the change in sentiment. Ever since hitting a high at the $185 level, JPM has settled into a trading range between $160 and $170. Last Thursday, the stock broke out of this range to the downside. This was followed by further selling on Friday, putting the stock below is 50-dma at $155. Since then JPM has been moving ever lower on the back of the 5-dma near $155. Since late August, JPM has formed what appears to be a head and shoulders pattern, with the neckline at the $150 level. A break below $150 support today suggests that there is further downside ahead. Aggressive traders looking for an entry may want to target shoot a failed rally above resistance at $150 and $155 a break below $145 on volume would serve as an entry point for conservative traders. Let us not forget that Chase (CMB) recently proposed to acquire JPM. Make sure to confirm direction in CMB before entering new positions. ***October contracts expire next week*** BUY PUT OCT-150 JPM-VJ OI=1629 at $6.50 SL=4.50 BUY PUT OCT-145*JPM-VI OI= 514 at $3.88 SL=2.50 BUY PUT OCT-140 JPM-VH OI= 418 at $2.13 SL=1.00 Average Daily Volume = 1.93 mln ********************** PLAY OF THE DAY - PUT ********************** AETH - Aether Systems Inc $75.81 -3.88 (-6.44 this week) Aether Systems is the company that offers information in the palm of your hand. They provide wireless data services and systems enabling people to use wireless handheld devices for real-time data communications and transactions. The company also designs and develops wireless data systems and software engineered exclusively for healthcare, education and government. AETH is based in Owings Mills, MD and has branch offices in New York and Florida. Most Recent Write-Up An early slide below $80 and a failed attempt to break above $88 in Monday's session demonstrated the stock's increasing weakness. If you missed jumping on board on the strong bounce towards previous support at $90, then there were plenty of opportunities to buy into the downtrend as AETH continually bumped its head on the 5-dma ($83.55) line. The dramatic sell-off on accelerating volume at the end of today's session is hopefully a precursor to succeeding losses. There is some historical support at the current level, if you date back to the first months of the stock going public in the fall/winter of 1999. However with the 52-week low at $41.13, there is plenty of room to freefall. Besides the recent release of 24 mln shares into the market following the lock-out period, this is purely a snowballing momentum trend. Comments The NASDAQ woes continue. It has gotten ugly in after hours with YHOO losing ground, as well as most tech stocks. To play this put play, a break of $75 on good volume would warrant an entry. Sellers could take the stock to $70. If AETH finds some buyers, look for a high volume rollover near $77.50 to jump in. This would be a nice entry if the market turns negative, along with AETH. ***October contracts expire next week*** BUY PUT OCT-85 HIZ-VQ OI= 42 at $13.63 SL=10.50 BUY PUT OCT-80*HIZ-VP OI= 22 at $10.00 SL= 7.75 BUY PUT NOV-75 HIZ-WO OI=148 at $13.50 SL=10.50 Average Daily Volume = 1.15 mln ***********************ADVERTISEMENT************************ Get a NextCard Visa, in 30 seconds! 1. Fill in the brief application 2. Receive approval decision within 30 seconds 3. Get rates as low as 2.9% Intro or 9.9% Fixed APR http://www.nextcard.com/index6.html?ref=aff0049911 ************************************************************ ************************ COMBOS/SPREADS/STRADDLES ************************ Trading Strategies - The Limited-Risk Approach The Spreads editor is away from the market this week but he has generously provided some superb educational narratives for new traders. The secret to success in any form of trading is to have a well defined strategy, a plan of attack. The options market is unique because it offers a variety of different ways to profit however, the risk can often be significant. The easiest way to limit or control the potential for loss is to devise and follow a specific system or set of rules. The structure of this system will require a number of profitable strategies along with the knowledge to implement and manage them correctly. The primary requirement for profitable trading is the ability to achieve reasonable returns and control risk effectively. For this reason, a plan without specific targets and loss-limiting features is certain to fail in the long-run. A careful and deliberate approach to strategy selection is the first step in the process. After the principal techniques have been identified, it is crucial to execute them with discipline and consistency. Discipline in option trading is the ability to maintain one’s self-control and implement the pre-determined plan. The most difficult skill that traders must learn is the ability to overcome human (emotional) impulses. When real money is at stake, the influences of greed and fear (of loss) will attempt to sway your judgment, hindering a rational thought process. If you can not overcome these effects, the chances of success are slim. In fact, that is the primary reason it is so important to utilize strategies that promote a mechanical approach to trading. Techniques that offer little opportunity for indecision generally provide more consistent returns and they are exposed to far less risk than those with a high level of maintenance. Profitable trading strategies have a number of common traits; well defined principles, ease of execution and flexibility. However, the most important characteristic for the majority of investors is asset preservation. In the options market, the most successful systems are those which employ sound defensive measures. The ability to protect and conserve portfolio capital, while achieving consistent returns is a fundamental quality of any profitable technique. Fortunately, numerous option trading strategies satisfy this criteria and our goal at the OIN is to help novice investors discover the most appropriate combination of trading techniques and provide them with the tools necessary to profit on a regular basis. With that concept in mind, we offer the following commentary as an introduction to fundamental spread strategies. The majority of option traders use derivatives to speculate on the movement of stocks and indexes. The appealing feature of option ownership is leverage with limited risk. If a trader correctly predicts the market direction and takes the appropriate position, he can expect to make a profit. Unfortunately, that technique has a relatively low probability of success. As all option traders quickly discover, owning the correct position (CALL or PUT) when the market moves in the predicted direction will not necessarily be profitable. The reason is, over short periods of time (while the trader is waiting for the option to rise in value), the position is at risk from a variety of changes in the market. One method that experienced traders use to overcome this problem involves simple combination positions or "spreads." Spreading trading is one way to take advantage of mis-priced options and premium disparities, while at the same time reducing the effects of short-term changes in market conditions so that a position can be held to maturity. Most successful option traders engage in some form of combination, position or spread trading. The basic technique involves buying and selling simultaneous (but generally opposing) positions in different option series. The most common strategies are used to reduce the cost, and the risk, of a position while providing a higher probability of a limited return. Other, more advanced methods of spreading are based strictly on pricing disparities. Experienced traders know there is an identifiable relationship between various option series and when the relationship appears to be mis-priced, they will buy the under-priced position and sell the over-priced position. The spread will profit as the prices of the instruments return to a linear relationship. The wonderful thing about option trading is its diversity. There are an incredible number of strategies available, one for every type of market trend, character and outlook. Positions involving combinations of calls and puts, with different strike prices and expiration months, along with index and futures options, offer the astute trader a variety of ways to participate in the market. This assortment provides even the most conservative investor the ability to construct positions with an acceptable level of risk and reward in almost any situation. In addition, students of option pricing theory can identify combinations with potentially superior returns when the relationships between the options are theoretically skewed. While there is no "perfect" position, successful traders learn to maximize profits and hedge their risk in as many different ways as possible, limiting the effects of short-term volatility and market gyrations. Obviously, there is no way to completely eliminate risk but you can reduce it much more than that of a inexperienced trader who does not utilize all of the available strategies. Good Luck! ********** DISCLAIMER ********** Please read our disclaimer at: http://www.OptionInvestor.com/page/oin/aboutus/disclaimer.html
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